Thursday, January 30, 2014

Is the Income Tax Really Fair?

What is a fair tax system? Some people support the income tax system because it's progressive, meaning that the more you make, the more you pay. They suggest that sales taxes are unfair to the poor. This is a specious argument.

If we exempt food, medicine, energy and housing, we exempt those things that are most necessary to the poor and on what they spend most of their money. Poor people don't have a lot of discretionary money. That is why they're poor. So a sales tax that exempts basic necessities means that as a percentage of their disposable income, poor people will pay a much lower tax than wealthy people. But they will sometimes pay some tax.

And we should tax the poor! People don't place much value on things that they get for free, and if we want poor people to value their government and participate in it, then they should bear at least some of the costs.

But I want to address those who say that a national sales tax is not fair to the poor. What is fair about the income tax system?

Is it fair that a person who earns $75,000 per year working for a company and living in an apartment can file a simple tax form that costs very little to prepare and a person who lives in house and makes the same amount of money managing a small business that employs three other people must spend thousands more to have their tax return prepared?

Is it fair that a person who buys a small energy efficient home with a small mortgage gets a small tax deduction and a person with a huge, energy inefficient home with a big mortgage gets a huge tax deduction?

Is it fair that large corporations can hire lobbyists to influence tax policy, but everyday working Americans don't have anyone looking out for their interests?

No tax system is perfect, but the sales tax system with exemptions for basic necessities seems much fairer than the income tax system.

Tuesday, January 28, 2014

How Replacing the Income Tax with a National Sales Tax Would Lead to an Economic Boom

Imagine this: Beginning in 2015, there's no income tax. The national sales tax, which will replace the income tax, begins in January of that year. This would stimulate the economy like a thousand stimulus packages combined.

Everyone would of course want to beat the tax increase, so people would be buying new cars, televisions, furniture or any other major purchase that they could shift into 2014. The media would be filled with "beat the new tax" ads and advertising agencies, retail stores and manufacturers will have record profits. Stores would have to hire more people, manufacturers would be working three shifts to meet the demand and anyone who wanted to work and was able to could find a job.

But what happens in 2015 when the new tax kicks in? Since there's no income tax, people's pay checks are suddenly 30 to 50 percent larger. Eventually, that extra money will flow into the economy as well. This would provide a long-term benefit.

But there's another huge benefit to eliminating the income tax system. Business and people will save huge amounts of money as they will no longer be required to provide all the data necessary to comply with the law. They also would be able to re-deploy their people to more productive activities since they wont have to spend so much time helping their customers and employees comply with the tax code. This huge reduction in expenses would provide a boost to corporate earnings.

. . . But you tell me what you think. Do you think a national sales tax in theory and practice would provide a boost to the economy?

Friday, January 24, 2014

The Sales Tax is Simpler and More Efficient

We currently have two main tax systems. We can save a lot of money by having just one.

With any tax system, we should strive to maximize efficiency. Efficiency should measure how much it costs the government and the taxpayer to raise a dollar of revenue. The sales tax system is very efficient for the tax payer. There are no forms to file, no cost basis to keep track of, no receipts to keep or depreciation schedules to maintain and no accountant to pay at the end of the year. It takes no time for the citizen to comply with the law.

For the retailer, the sales tax is only slightly more complicated. They file a simple form, usually monthly that says, "I sold this much stuff so I owe this much tax" and they remit the money. For businesses that don't sell to the end user, there is nothing to report.

Contrast this system to our current income tax system that poses huge costs on businesses that must report all types of information from W-2 income and dividends to interest and sales of capital assets. Mortgage companies need to report interest paid and brokers must report capital transactions.

Mutual fund companies track dividends reinvested. And if you don't have the basis, our friends at the IRS just assume the basis is zero and tax you on the whole damn thing.

IRA custodians must track distributions, and God help you if you have an IRA with after-tax dollars in it because you will suffer the most Byzantine system for reclaiming your own money without being taxed twice.

Billions of dollars are spent by businesses to just provide the information to us along with countless hours preparing documents to take to their CPA. Then we as citizens pay billions of dollars to file a form.

When you compare all the costs of the two systems, it's clear that the sales tax system is a much more efficient system.

But why have two systems? With two systems you must support two bureaucracies. By using just one system to collect revenues, we eliminate a whole level of overhead.

Wednesday, January 22, 2014

Let's Abolish Income Taxes

Let's assume that there were no federal taxes and we were designing a tax system that would give the government the money that it needed to pay the armed forces, run the justice system and carry on the necessary business of our nation. What type of system would we devise?

We would want a system that was simple, so that people knew exactly what they had to pay and also was not onerous to comply with and took very little of the taxpayer's time. We would also want a system that was fair, so that everyone who had the ability to pay would contribute and those who earned much more in our society carried more of the load (but not in a disproportionate way). And we would want a system that was impervious to influence by special interests. We would want an egalitarian system that did not allow those with more wealth or political power to unduly influence the legislature to gain advantages at the expense of everyone else.

We certainly would not devise the current income tax system with its mind boggling complexity, gross inequalities and susceptibility to influence by vote-seeking politicians and well heeled-lobbyist.

Actually, we have a system that meets all of the requirements. It is the sales tax system. And if our country were to do away with the income tax and replace it with a national sales tax, it would unleash an economic boom that would last for decades.

What I will do in the next several posts is outline the benefits of replacing the current income tax system with a national sales tax. Please share the posts on Facebook, Twitter, LinkedIn and other social sites if you agree (or even if you disagree, and if you disagree, please tell me why in the comment section! I'm interested in all debate.).

Saturday, January 18, 2014

Understanding Government Coercion and The Affordable Care Act

In order to function, our government must have coercive powers. Without these powers, the government could not levy taxes, provide for national defense or enforce the criminal and civil justice systems. We would have anarchy. However, it is important to realize that many laws restrict our freedoms and our choices. So it's extremely important that we're always vigilant to avoid having the government restrict our freedoms and our choices. . . unless there's a compelling reason.

When President Obama was campaigning for the Affordable Care Act, he said he would, "ask wealthy Americans to pay a little more." This is what he said, but it's most certainly not what he meant. After all, if he just asked wealthy Americans to pay a little more, many would have said no. What he meant was that he was going to use the coercive powers of government to confiscate a larger share of the earnings of the Americans he deemed to be "wealthy."

He also intended to create a large government bureaucracy to oversee a program that forced many Americans to purchase new insurance policies or pay a fine. While some people would receive subsidized or free insurance other people would be forced to give up their existing insurance (because their insurance companies are no longer permitted to offer it) and purchase plans with higher premiums as a result of the act.

So it seems that with the Affordable Care Act there are winners and losers. The winners are the people whose insurance is being subsidized by other Americans and those people who get lucrative government jobs in the bureaucracy created to administer the Act. The losers are those people being forced to buy more expensive coverage or to pay higher taxes to help pay for the bureaucracy.

Whether you like or dislike the Act may depend a lot on whether you're a winner or a loser. One lady who thought she was a winner was Jessica Sanford. Sanford wrote the President a letter thanking him for the Act. According to Sanford, she hadn't been able to afford insurance for the last 15 years, and she was crying tears of joy when she finally was able to get coverage she could afford. She thought she would be able to purchase a Cadillac insurance plan for her and her son for about $170 per month.

The President was so impressed by her letter, that he read part of it in the Rose Garden as an example of how the Act was helping everyday Americans. Unfortunately for Jessica, shortly after she wrote the President, she received a letter telling her that the price she had been quoted for her insurance plan was wrong and she would have to pay much more. She felt that all of the plans were too expensive than what she could afford so she's now just going to pay the penalty and remain uninsured.

My question for thinkers: Is the Affordable Care Act a good use of governments coercive powers?